Companhia Paranaense de Energia (ELPC) 2014 Q2 法說會逐字稿

Presentation

Good afternoon, and thank you for waiting. Welcome to Companhia Paranaense de Energia - Copel's conference call to present the earnings of the second quarter of 2014.

(Operator Instructions)

Before proceeding, we wish to clarify that forward-looking statements that might be made during this call related to the business perspectives of Copel, operating and financial projections and targets are beliefs and assumptions of the Company's management as well as information currently available.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions as they refer to future events, and therefore they depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operating factors may affect the future performance of Copel and may lead to results that differ materially from those expressed in such forward-looking statements.

In this call, we have Mr. Lindolfo Zimmer, CEO of the Company; Mr. Antonio Sergio de Souza Guetter, CFO and Investor Relations Officer; and Mr. Sergio Luiz Lamy, President of Copel G&T; and Vladimir Daleffe, President of Copel Distribution.

The presentation that will be made by Copel's management may be followed at the Company's website, www.copel.com/ir.

Now, we would like to give the floor to Mr. Lindolfo Zimmer, CEO of the Company.

Good afternoon. This is Antonio Guetter, CFO and Investor Relations Officer. First, I would like to welcome you all to the call that will be presenting the second quarter of 2014 earnings of Copel. First, I would like to thank you for your presence, for the presence of those who follow this call, and I would like to mention that it is always a great, great pleasure to talk to you.

I will be speaking slowly so that the interpreter may follow the presentation.

2014 has been a year of many challenges to the electric business, Brazilian electric sector, because of the below-average rainfall especially in the regions with the largest reservoirs. And this fact together with the delay in the construction of many plants, this has been bringing pressure on energy prices with a direct impact on customers.

Tariff adjustments of distribution companies is one example of that, with more expensive energy. ANEEL has been authorizing significant adjustments to all companies in Brazil. And in the case of Copel Distribution, the agency established a more than 35% adjustment. However, after a request by the Company, ANEEL authorized the application of an average adjustment of 24.86%, and the deferral of the remaining percentage, which will be restated by the IGP-M and recovered in the next tariff adjustment.

With relation to the highlights of the second quarter, as you can see on slide number 3, our net income was BRL248 million, in line with what we delivered in the same period last year, minimum difference on a year-on-year basis.

Consolidated revenue grew by 48% and exceeded BRL3.1 billion, whereas the EBITDA closed the quarter at BRL467 million, with a 6% increase. And this result is once again explained by the performance of our generating company, especially by the sale of energy in the spot market and also the sale of energy produced by Araucaria thermal power plant that is once again -- that (inaudible) this year, started again to be operated by UEG Araucaria, a subsidiary of Copel, and [showed] about 417 average megawatts between February and June 2014, or the equivalent to this amount.

In spite of the growth in revenues, costs with the purchase of energy once again impacted the consolidated results. And considering only the second quarter figures, they went up incredibly -- 77%, driven by the costs related to the thermal contracts and the re-contracting of energy in the A-1 and A-0 auctions. And the price of energy in these auctions was established at higher levels.

On the positive side, the captive markets of Copel Distribution had a good performance and accrued 6% increase in the first half of the year, whereas the consolidated payroll costs were 5% lower in the first half-year, a fact that is in line with the objective that we drafted in the sustainability plan of the Distribution company for 2014 and 2015.

Lastly, we should stress the start-up of the [Subita Facility III], 100% Copel, in the interior of Sao Paulo state, and the [assets of] Caiua Transmissora de Energia (SPE), where Copel has a 49% stake. All together, these assets represent an increase of BRL14 million in Copel's [RAC].

In the renewable energy segment, we acquired 49% of the Sao Miguel do Gostoso wind farm, which has 108 megawatts of installed capacity and is located in the state of Rio Grande do Norte, and we signed a partnership with WEG to increase the Palmas wind farm in the state of Parana.

These were the main highlights for the second quarter. Nevertheless, before we talk about the financial performance, I would like to give you some more color about the Copel Distribution tariffs and also about the Araucaria thermal power plant.

Now, going to slide number 4, about Copel Distribution tariffs. As you can see on slide number 4, we should stress here that the average adjustment defined initially by ANEEL was 39.71%, according to calculations available on technical note 193/2014, which took into account, besides the significant increase in the cost of energy, the recovery of last year's deferral.

Nevertheless, by authorizing the adjustment, the agency decided to keep the deferral and ended approving a [25%] adjustment, which was slightly lower than the one that we forecast before. And as you know, we requested the suspension of the adjustment with the perspective of increase of -- or, the application of a new deferral which was authorized by ANEEL. Thus, the tariff of Copel Distribution suffered an average adjustment of 24.86%.

The remaining percentage, which is the difference between the initial and applied adjustments, is equivalent to BRL900 million, of which BRL276 million refers to the 2013 deferral and BRL622 million refers to 2014 deferral, as you can see on the slide. It is always important to stress that deferral does not hinder the financial health of the Company, [once] the deferred amount will be adjusted by or restated by the IGP-M and recovered in the next tariff adjustment.

And lastly, still on this slide, I would like to draw your attention to the cost of the energy contracted by Copel Distribution, as you can see on this table. On the lower part of the table, the average cost of energy went up over 35%, going from BRL130 per megawatt-hour in the previous tariff year to BRL176 per megawatt-hour in the current tariff year. And this increase is related to the increase in the cost of energy acquired during the auction and a higher expectation of thermal dispatch over the next 12 months.

On the next slide, slide number 5, we give details about the amount received by means of the transfer of the CDE and ACR account resources. As you can see, between January and April we received over BRL1 billion to cover costs related mainly to the involuntary exposure and also to the dispatch of thermal power plants.

I would like to remind you that in this period Copel Distribution was obliged to acquire energy in the spot market due to the involuntary exposure caused by the lack of auctions to [rebuild] in sufficient amount the energy that expired at the end of 2013. However, by the end of April, the [distribudora] acquired 388 average megawatts in A-0 auctions, [beginning sale to distributors] in May an average price of BRL268 a megawatt-hour.

After acquiring this energy, Copel [Dis Co] is 100% contracted until the end of 2014, which decreases the need for transfers of resources from the ACR accounts.

Specifically about the second quarter, we received a transfer of BRL177 million to cover the costs referring to April, and this was the only amount recorded in the period. For the settlement of May, that was postponed to the end of August due to the lack of resources in the ACR account, the transfer has already been defined at [BRL90] million, an amount that was not recorded in the quarter. And for the June settlement that occurred last week, no amount was authorized for the [Dis Co].

And before talking about the financial performance, I would like to highlight the results of the Araucaria TPP. As I said before, gives a significant contribution to the Company's consolidated results. As you can see on slide number 6, since February 1, 2014, the plant's operation is under UEG Araucaria's responsibility, a company that is controlled by Copel and that has 80% of its capital stock; and the 20% remaining, they belong to Petrobras.

[UEG Araucaria] does not have an availability contract and operates under the merchant modality, in which the revenue depends on the operation of the plant and the energy when produced is sold at the spot market.

Over the five months of operation under Copel's responsibility, the plant produced about 1,500 gigawatts-hour, which brought about a revenue of over BRL1 billion and resulted into a BRL334 million EBITDA and BRL245 million net income, being BRL111 million in the second quarter, impacting directly the Company's consolidated results.

The plant is being [dispatched] in a recurring fashion, due to the low rainfall. The plant should continue operation until the end of the year and may be requested to operate even outside the order of merit, such as was the case in June when the spot price was lower than the CVU. [The plan for the plant which is BRL572 per megawatt hour, minimum amount for which the plant shall be energy produced.]

Now, regarding the consolidated results of Copel, you can see on slide number 7 that the operating revenue grew by 38% during the first half of 2014, exceeding BRL6 billion, and the main drivers for this revenue hike were: the 18% increase in the revenue from sales to end customers, due mainly to the 9.55% adjustment applied to the tariffs applied by Copel Distribution in June 2013 and also the 6% growth in the sale of energy to the captive market of Copel Distribution during the first half of 2014, on a year-on-year comparison; also, the 113% growth in the sales to distributors' accounts, stemming mainly from the higher revenues at the CCEE due to the sale of energy of [UEG Araucaria] and also the energy sold in the spot market by Copel G&T, which ultimately benefited by the high energy price in the period in the spot market; and the availability of the grid which is made up by the TUSV and TUST revenue went up by 9%, basically due to the growth of the [group] market of Copel Distribution; and the other revenues that include the revenues from construction, from telcos, from gas, and others grew by 12%, reaching BRL984 million, driven mostly by the growth in revenues from construction (BRL626 million), and it was an accounting entry of the largest investment in distribution and transmission, and also the 20% growth in the telco revenue that reached BRL80 million in the period.

On the next slide, slide number 8, we show you the operating costs and expenses for the six first months of 2014, with a growth of 42% on a year-on-year basis, driven in great part to the 43% increase in expenses with energy bought for resale, which exceeded BRL2 billion. And I would like to remind you that this amount already considers the compensation of BRL1 billion by means of transfers from the CDE, the energy development account, and also the ACR account, which was booked between January and April.

The [costs charged] for the use of the grid grew by 44% in the period, basically driven by the comparison basis effect, [once] in the second quarter of 2013 there was an extraordinary transfer of resources from the CDE account amounting to BRL200 million in order to compensate the [costs charged] for the services of the system related to the dispatch of thermal power plant outside the order of merit at the beginning of 2013.

The first half of the year was marked by the increase in expenses with the purchase of gas by Copel Gas, which by [this year] to supply Araucaria TPP which since February operates under Copel's responsibility.

Now, payroll costs including social security benefits dropped by 5% and they are detailed on the next slide, where we also detail the control of the manageable costs, on slide number 9. As you can see on this chart, consolidated costs with payroll and third-party severances lost by 3.4% in the first half of the year and, if compared to the IGP-M, 6.2% in the last 12 months.

This represents an above-10% drop in manageable costs, which shows the extent of our cost reduction efforts by the Company. And the largest contribution to this reduction comes from the lower expenses with compensation and charges, coming from the reduction of our headcount over 2013.

And we count on 8,573 employees currently, which represent an 8% reduction on a year-on-year basis regarding our headcount. As you can also see, that the reduction in our headcount continues in 2014, and 74 people have enrolled in the incentivized voluntary redundancy plan, and they left the Company since the beginning of the year.

I would like to highlight that [analyzing just] Copel Distribution's figures, the reduction in manageable costs was BRL55 million in the half-year, which is in line with what we expected and according to our objective of saving BRL100 million in 2014 to bring the result of the distribution company closer to the regulatory benchmark that we intend to achieve in 2015.

On slide number 10, we separate the cost with energy bought for resale, because as we said, it grew 43%, amounting to over BRL2 billion in the first half.

The purchase of energy in the regulated market grew due to the contract of 511 megawatts in the A-1 auction held in late-2013 [and the sales of which have just] started in January this year and the hiring of 388 average megawatts in the A-0 auction, with sales to distributors started in May. And in both auctions, the price of energy was established at high levels, as we have already referred to.

I would like to mention that the inflow of new energy contracts in order to meet the needs of the growing market and also the higher costs with the thermal power plants also had an impact as well as a monetary restatement of contracts [in force], which were restated by the inflation in the period, besides the higher cost of the contracts in the regulated market.

The [price for the] purchase of energy at the CCEE grew due to the high spot price, whereas the cost with ITAIPU grew, driven by the increase in the amount of energy bought and also by the appreciation of the dollar in this period.

Going back to our earnings, on slide number 11, we can see that the consolidated EBITDA grew by 20% in the first half, amounting close to BRL1.3 billion, with a 22% margin on the [up-trending] revenue.

[TS] generation by Copel G&T accounted for 93% of the consolidated EBITDA, whereas Copel Telecom represented 4% and the other companies in the Group, only 3%, impacted by the results of Copel Distribution which had a negative EBITDA of BRL316 million in the half-year, the consequences, again, of the higher costs with the purchase of energy as we have already shown.

EBITDA margin at Copel G&T reached 74%, an expressive figure; in Copel Telecom, 56%.

On slide 12, we present the consolidated net income of Copel, which was BRL831 million in the first half-year of 2014, an amount which is 28% higher than the one achieved in the same period last year.

Net margin was 13%, practically in line with the result of the previous year.

Analyzing the result of the subsidiaries, we can see that Copel G&T ended the first half of 2014 with an BRL821 million net income, 48% higher on a year-on-year basis, and with a net margin of 50%.

Copel Telecom posted BRL28 million net income, corresponding to a 21% increase on a year-on-year basis.

Copel Distribution, [in its turn], posted a loss of BRL229 million in the first half of the year, once again the consequence of the high cost with the purchase of energy.

These were the main highlights about Copel's results. However, before finalizing, I would like to make a few remarks about the start-up of transmission [thanks to] the new investments in renewable energies. As you can see on slide number 13, at the end of July, (inaudible) substation Cerquilho III [method] was with 100% Copel G&T, and Umuarama - Guaira and Cascavel (inaudible) transmission lines were started up, as well as the substations Cascavel Norte, Santa Quiteria -- all these belonging to Caiua Transmissora de Energia, [MSP], where Copel has a 49% stake.

All together, these ventures are already delivering an additional [RAC] of BRL14 million.

Besides, in the renewable energy segment, we acquired a 49% stake in the Sao Miguel do Gostoso wind farm located in Rio Grande do Norte, with 108 megawatts of installed capacity. And lastly, we signed a partnership with WEG for the construction of the Palmas II wind farm in Parana.

All in all, these were the highlights of Copel's results. Now, we would like to invite you to participate in the (inaudible) meetings that we will be holding next week. For those who are in Sao Paulo, the event will be next Wednesday, August 20; and for those who are in [Rio], this meeting will be on August 21, Thursday. At the regional centers of (inaudible). You may contact our investor relations area.

Now, we would like to open for questions from the audience.

(Operator Instructions) Juliana, Itau BBA.

Good afternoon, everyone. I have two questions. -- that you have raised BRL1 billion for the next tariff year. What about the impact that this has on your appetite for new investments? What about A-5? What is your expectation for GSF for the new few months?

Thank you for your question. I like your questions very much. You asked if we would have the same appetite for investments. Of course, in this situation the Company has to review the way it [devotes] its resources. With the limitation in resources, of course we have to be careful. However, this does not mean that we will not continue to participate in the market in a consistent fashion, such as has been the case until now.

Good opportunities will be considered, and of course we will be willing to participate. Of course, we'll have to reshuffle our investments and revise our time schedule for investments, and all this will require revisiting this area of investments so that we may mitigate these restrictions and (inaudible).

But I understand we will be surviving in a very healthy fashion to this moment because if on one hand we have difficulties, on the other hand we have opportunities. But Araucaria is [really a good challenge, and we are being able to keep our case].

So, we will always pay very keen attention to investment opportunities and according to the guideline that has always guided the Company; that is, to see investments that may be healthy and be a very good investment of funds.

And your other question was about the participation in the A-5. Our team is prepared, and it has been tackling the issues. And up to now, we are enthusiastic about the possibility to participate. And of course, the details and the studies and the conclusion of the studies will define to which extent we can increase or decrease our appetite. But in principle, we will be participating.

Good afternoon. This is Sergio, from Copel G&T. Sergio Luiz Lamy.

Regarding GSF for the second half, [0.9] is the figure we estimate, maybe slightly lower than [0.9] now in August. But as of October, this should be going up slowly, reaching [0.94], [0.96] towards the end of the year.

Thank you.

[Gabriel, Safra Bank].

Along the same lines about GSF, I would like to understand in Generation if you intend to ask for the compensation due to the impact? And if it does occur, if this request will be separately made by Copel, or whether you will be doing this with the other members of the Association of Generating Companies? And what would be the possible rationale to justify this reimbursement, or this compensation?

This is Lamy, from Copel Generation. We do not have a final solution regarding this theme, regarding this request to be submitted to ANEEL. We are debating this theme in the forum of the association, [ABRAGE], and we have not come to a conclusion yet. But if we submit a request, of course Copel will not be alone in that, or Copel will be doing this together with the association.

And the rationale that seems to us to be relevant for this kind of request or claim is the quality of the thermal generation contracted [with] excessively high costs for generation. And the generation players are -- they are subject to this high amount in the case of a lower generation.

And the planning for expansion and the responsibility for the expansion of this production of more expensive energy lies in the hands of the regulator. So our hands are tied. And this is a risk that doesn't seem to be reasonable as far as we are concerned.

Pedro Manfredini, Credit Suisse.

I have two quick questions. The first one is about Araucaria. We saw the success of the Araucaria. What is your strategy regarding Araucaria? In the past, it was leave to (inaudible) for some time. So, what is the alternative that you have for 2015 and 2016? What are you planning to do with Araucaria?

And the other question had to do with [Colibre]. We know that Colibre would have to come in the next few months in the grid. And what about contraction? What about the status of this project? Could you give us an update?

Pedro, this is Lindolfo. About Araucaria, of course this year we'll still require Araucaria to dispatch until the end of the year, until the arrival of the new rainfall season, the normal period. And this will decrease the chance of Araucaria continuing to dispatch for the next year.

But we do not know what the future holds. Maybe this (inaudible) is not as I described. It may be it continues to be necessary.

I would like to share some [perspectives] about Araucaria. This operates due to security reasons for the system, for the center of gravity of the south region. And from the electricity [required], this might be necessary to guarantee the stability of the whole system that covers our region. So, the possibility of dispatch of Araucaria is higher than the merit of keeping [cold]. It goes beyond that.

On the other hand, we expect that with the evolution -- that explorations that could bring gas at a lower price, this will mean opportunities for Araucaria to dispatch more favorably. (inaudible), as it's already supplied by Petrobras and there is nothing we can do about that. We expect to get that it's more competitive and may allow us to dispatch more. Anyway, if it dispatches [integrally] such as is being done, Araucaria will have -- perform this role and could be the results that were expected by us.

Regarding [Colibre], our project is slightly behind in fact, [and] we are working to figuring the beginning of commercial operations in the second half of 2015. And this remaining in the project was driven by facts that were not under the responsibility of the Company and that were aggravated by characteristics of the region where it is being built, mainly construction activities. For instance, the dam cannot be built in a rainy season and in that region you have half of the year with a lot of rainfall. And other events that are not under the responsibility of the Company.

And because of these facts, there was a delay in the construction. So, regarding this questions, Copel G&T has owned energy reserves of course, because we are very cautious. We have to prepare to comply with our commitments, but undoubtedly we will be submitting to ANEEL a claim for exclusion of responsibility in this regard, so that we are not hindered by factors that are not under our control and that are not under our responsibility therefore.

Still regarding [Colibre], you said about the exclusion of responsibility in your claim. So, do you think the contract could be extended? If you aren't able to get the exclusion, can you roll it over for another six months? Or, is it just a matter of not being penalized? Do you have this facility regarding the concession extension?

Yes, we are going to submit this request, as well, of extension of the concession terms.

Carolina, Santander.

Two questions. What about the energy balance that you always make available? I was a little bit late connecting to the call. I don't know whether you referred to that, or not. But could you give us an update regarding the amount that you have available for next year without the contract that [is conserved as a hydrological hedge]?

And the second question. Probably, the regulatory agenda is rather complicated, but do you have any update regarding the concession renewal process for Distribution. We know that this is only next year that we will see some movement, but you probably had talks with the regulators. So, do you have an idea of the time frame and when we will have news about parameters and the announcement about these decisions of ANEEL? Any additional information about this program?

This is Sergio Lamy. I will answer the first part of your question regarding the availability of energy next year. Then, I will pass the microphone over to Vladimir, from Copel Distribution, that will answer your other question.

Our availability of energy for next year is around 13% of our typical guarantee, around 250 megawatts for instance.

This is Vladimir. We have been maintaining frequent contact with the regulator, with ANEEL. As you know, that the agency is [several] and they will -- the federal government will be defining this.

And there are two issues involved. The main one is that the fundamentals that will be guiding this decision have already been achieved. So, Copel over the last few years has been beating national benchmarks. And as you have issues involved regarding sustainability and balance, economic and financial balance, we have been able to [gain] a significant reduction of our (inaudible) we made last year, last couple of years [in fact].

If you consider the inflation, we have a significant productivity gain and have already submitted to ANEEL the fact that we would be reaching this (inaudible) sustainability level [of 2015]. And I think that our projections for 2015 are (inaudible) and that ANEEL (inaudible) about our claim for renewal that should happen generally in January but has not happened yet. What happens is that in a few months it will not be possible to make the transfer of controls (inaudible). All in all, our expectation is rather foolish.

One more question. We have the impression that you have a positive allocation the first half, and you have a partial tariff increase that you have deferred for next year. In fact, your results will be (inaudible) and maybe because of headwind GSF, in spite of the Araucaria operation. So, could you please talk about your cash balance and how do you imagine to maintain dividend payout policy? If there will be any change in that? If you will keep the same dividend payout that you had last year, due to the pressure that we see from now on? So, could you please tell us what you see as the possibility of dividend payout vis-a-vis last year, given the current situation?

Carolina, this is Antonio Guetter. There are two questions. One, about the financial and economic balance, and as our CEO said at the beginning of the Q&A, we made a reassessment of our time schedule for investments and we alternated BRL2.6 billion [in these] investments. So, we reviewed our time schedule in order to keep our cash levels [as possibly under control].

And about the dividend policy, albeit to maintain this policy and getting closer and closer to the average of the market. But of course, [we will be assessing] rather prudently and on a timely fashion the dividend payout situation. But in principle, we are capable to maintaining the dividend payout policy that we have been maintaining at Copel the last few years.

Thank you very much.

As there are no more questions from our participants, we would like to give the floor back to Mr. Lindolfo Zimmer for his closing remarks.

Once again, I would like to thank you all for participating in this call, and it's been a great pleasure for us to present our results to you and talk about the perspectives for the future.

So, once again, thank you very much, and I wish you a very good weekend, and say that our investor relations people and our financial team are available to you if you need any further clarification, as well as the other areas of the Company -- generation, transmission, and distribution.

(inaudible) and thank you very much and have a good weekend.

Ladies and gentlemen, Copel's conference call about the results of the second quarter of 2014 is closed. Thank you very much and have a good afternoon.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.